Good news for the UK high-tech sector is the return of VC interest, and the best part of it is that interest is coming back to semiconductors.

Last week, the technology corporate finance advisor, Ascendant, reported that Q1 2007 showed a steeply growing investment pattern in the UK.

“It was the first time since 2000 that the UK has experienced three consecutive quarterly increases in investment in the sector,” said Stuart McKnight, managing director of Ascendant. He predicted: “Investment for the whole of 2007 might get close to £1bn. Investment has not been at these levels for nearly six years.”

In Q1 2007, over £300m was invested in 56 deals worth over £500,000 each by 106 active investors, said Ascendant. That was a 64 per cent increase from Q4 2006, and up from the £220m invested in Q1 2006.

Why is it happening? “When you look at the pool of investors over the last four to five years, a lot of them have struggled to raise funds,” said McKnight. “The VCs were short of money but, in the last 18 months, quite a few have been successful in raising funds - for example Amadeus - so we’re seeing new money coming into the market.”

The semiconductor industry is beginning to interest the investors again. Of that £300m, £75m went into the sector, with a proportionately declining amount going into software.

This is good news, by default, for the semiconductor sector because the UK has always been seen as a strong sector for software, with VCs investing appropriately.

However, it now appears that VCs are beginning to appreciate that software companies are difficult to grow above a certain point, whereas the growth potential for semiconductor companies is pretty well unlimited.

Asked about the move back to semiconductors, McKnight replied: “There’s been a general drift away from software to other sectors with potentially greater returns. Those include semiconductors and the Internet.”